Buying off the plan vs an established home

There are lots of different ways to buy a home, and buying off the plan is one of them.

Buying a property off the plan is very different from buying an existing home at an auction and walking in the front door. Building one instead can be a viable strategy, so we’ll go through how this works.

What is buying off the plan?

An ‘off the plan’ purchase is when you buy a property that hasn’t even been built yet. All you have to go off is a building plan, so you’re buying ‘off the plan’ without a single shovel being put in the dirt yet. Once you’ve bought the land, you’ll then have to finance the construction of the property and wait until it’s fit to live in, which can take a while.

What about buying an established home?

Buying an established home is the more common option these days, and as the name suggests is simply buying an existing property. This is a convenient option as you can move in more quickly and has fewer potential complications when building, which can also give you a more accurate idea of the price without any blowouts.

But, buying established also has the disadvantages of the house not being specifically tailored to your needs, but rather the person who originally built it. These houses can also be more popular, which means they can be harder to buy, and ones closer to desired locations can be very expensive.

Pros and cons of buying off the plan

Buying off the plan has some benefits, and plenty of risks as well. Many of the cons here don’t apply to established homes, while some of the pros (mainly the cash grants) often do.

Pros

• You can get some government grants: By building a home from scratch, you can qualify for multiple grants offered by the government. Two that spring to mind are the HomeBuilder scheme, which offers a $15,000 grant for new builds until 31 March (get in quick!), and the First Home Owners Grant (FHOG), which provides different cash grants for new builds depending on your state (if it’s your first home).

• You can get stamp duty concessions: Another cost reduction you can get is on stamp duty, which can be a major expense otherwise. This can vary by state, but if the property is below a certain value you can have stamp duty waived entirely, while Victoria also offers an ‘off the plan’ concession on top of this. These could save you tens of thousands.

• Developers give concessions too: The developers of certain properties might give you reduced costs or a cash grant/discount to build your home with them, but you should check the terms and conditions of these deals.

• You can customise the home and make it ‘yours’: This can save you from having to renovate or repair anything

• You can save money while it’s being built: Some builders only require a 10% deposit initially and let you pay the rest later

• There’s potential for capital growth: The property could actually increase in value even while it’s still being built!

Cons

• Construction can be difficult and lengthy: lots can go wrong when constructing a house, and things like bad weather can delay the build and stop you from moving in until later. Buying established homes is easier.

• Construction costs aren’t always accurate: Whether it’s something going wrong like above, or the developers adding extra costs, it’s easy for the home to cost tens of thousands more than you initially budgeted for.

• There are extra risks things can go wrong: A poor-quality build could add major repair bills later on. Plus, the build might not ever be completed. You should get your deposit back for this, but it’s still a waste of time.

• Financing the construction is harder: As we’ll explain below, loans for off-the-plan homes are a bit less straightforward than a regular home loan.

• The property can decrease in value: Just as it can increase in value during construction, so too can it decrease. Prices in the area could fall several % in the time it took to build, and a lower value could increase your loan-to-value ratio (LVR), which leads to extra fees.

How to buy off the plan

Although you need to do a lot of research when buying an established home too, having to build it on top of buying adds extra steps. Therefore, you need to make sure you do the following.

1. Find a good area to buy: Just as you would when buying an existing home, you need to find an area with vacant land that also has good livability on top of capital growth potential in the future.

2. Think about the property you want: Now, consider what kind of home you want to build? houses, apartments, townhouses etc. all have different merits and flaws, and depending on the area you might be limited in what you can build.

3. Have plans drawn up: Unless you’re a professional architect, find a reputable professional to create a building plan for you based on what you want. Keep a copy of any finished plans for later.

4. Find a developer: You’ll then need to approach a developer to build the property for you. You’ll also need to keep a signed contract for the build. These developers should give you a detailed schedule of costs.

5. Review the contract carefully: Once the developer gives you a contract, review it very carefully, looking at the deposit required, whether your desired plan is in there, what their defect policy is, the cooling-off period and so on. You can get a conveyance to do this on your behalf.

6. Check for those grants: As mentioned above, building a property can give you access to tens of thousands worth of state and federal government cash grants and discounts, as well as some from the developers themselves.

Last but not least, you’ll need to finance the purchase of the land as well as the property.

How to finance your off the plan purchase

While some lenders might let you use a regular home loan, chances are you’ll have better luck with a construction loan or a vacant land loan. Unlike a regular loan, a construction loan covers the expenses you incur as they happen throughout the building process, instead of a simple principal sum plus interest. For example, you will only have to pay interest on whatever you pay for these stages of construction one at a time:

1. The slab or base

2. The frame

3. The external walls, windows and doors

4. The internal fit-out

5. The completion of the property

Most lenders will require you to present them with plans for the property as well as a signed contract from builders before granting you approval for finance. But once you’re approved, it’s time to start building!

Construction loans tend to charge higher interest rates on average, but loans.com.au offers competitive rates lower than most other lenders. Find out if you pre-qualify for a loans.com.au construction loan today.

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